Gary Becker on the Minimum Wage

Controversy remains in the United States (and elsewhere) over the effects of the minimum wage mainly because past changes in the U.S. minimum wage have usually been too small to have large and easily detectable general effects on employment and unemployment. The effects of an increase to $7.25 per hour in the federal minimum wage that many Democrats in Congress are proposing would be large enough to be easily seen in the data. It would be a nice experiment from a strictly scientific point of view, for it would help resolve the controversy over whether the effects of large increases in the minimum wage would be clearly visible in data on employment, training, and some prices.

...Guy Laroque and Bernard Salanie, in a series of articles, such as " Labor Market Institutions and Employment in France," Journal of Applied Econometrics, 2002. They find that the relatively high minimum in France explains a significant part of the low employment rate of married women in France. Salanie has also argued that the high French minimum wage is important in explaining the dismal employment prospects of young persons in France, and the huge unemployment rate of Muslim youths there, estimated to be about 40 per cent.

Comments and Sharing

Is it enough if the minimum wage does not meaningfully affect overall unemployment, or would we also prefer to avoid taking jobs from the low-skilled poor and giving them to teenagers from affluent families? After all, teenagers from affluent families in the suburbs may make up a large percentage of the additional labor offered at the higher wage floor (since they can easily choose not to work), and may have job skills and connections superior to those of the poor.

I would suggest that Mr. Becker and other economists need not go as far as France to see the negative employment effects of a relatively high minimum wage. A close look at the unemployment statistics for young people in the US, in the age group from 16 to 19, will suffice as an indicator. The last statistics I saw was that unemployment in this age group was around 12% - sorry, I can't recall the source. While there is no 'scientific' evidence that a minimum wage contributes to unemplyement, there is significant enough anecdotal evidence to at least make the assumption compelling.

While a minimum wage is very politically correct and has a great deal of political appeal, the negative effects are probably far greater than anyone would like to admit. In the first order, a Federal mimimum wage is particularly ineffectual - $7.25 per hour, or whatever the feds decide is 'fair', is far more significant in Billings, Montana (one of the lowest wage rate states in the nation) than for a worker in San Francisco. And in neither case does that wage rate translate to the 'Living Wage' for a family of four that the pundits argue is the purpose of the minimum wage. That problem alone argues for a state-based minimum wage, rather than a Federal base, if any minimum wage at all.

The second order effects are those discussed by economists - does a minimum wage decrease (or dissuade) employment? Again, the anecdotal evidence is available that it does, but 'scientific' evidence - direct cause-effect - is missing. I suggest that a substantial part of the reason the 'scientific' evidence doesn't exist is due to the way employment/unemployment is measured, rather than a lack of correlation or cause/effect. Note that minimum wage is, by definition, designated for those workers considered to be minimally productive and to a large degree that means those young people who have not entered the work force and haven't learned or had the opportunity to learn how to be productive.

I would much rather see policy geared toward ecouraging young people to enter the workforce - and encouraging employers to hire young people to train them to be productive - rather than policy (minimum wage) that simply declares a worker, or potential worker, to be of some arbitrary productive value.

For those who would argue that I am advocating 'child labor sweat shops' or the like, I would counter that a dollar wage is only part of the compensation given to any employee. Particularly for minimally productive workers, experience will be far more valuable to the worker and the economy than the dollars guaranteed by a minimum wage. That is even more true if, by virtue of a relatively high minimum wage, even one potentially productive worker is denied access to a job. I would rather see young people given the opportunity to learn how to work and be productive at $5, $4, or $3 per hour than see the same people availing themselves of the various government programs designed to give young people something to do in their 'spare' time. The combined efforts of the school systems and government youth programs seem to be doing a fairly poor job of preparing young people to be productive, perhaps business can do better - if it isn't crippled in its ability to do so by ill-conceived Federal policy.

Are school systems and government youth programs really doing a bad job of preparing young people to be productive? And hasn't teenage employment generally be found to have negative effects (as opposed to building character, teaching the value of hard work, etc.)?

Whether the minimum wage rise is enough to have a significant effect on the total unemployment rate is one question, whether it will have a significant effect on the unemployment rate of certain groups that have less human/social capital is another question.

"The evidence indicates that even as individuals reach their late 20's, they work less and earn less the longer they were exposed to a higher minimum wage, especially as a teenager. The adverse longer-run effects of facing high minimum wages as a teenager are stronger for blacks."

Are school systems and government youth programs really doing a bad job of preparing young people to be productive?

Again, I know of no specific 'scientific' evidence to support this, but I would argue there is enough anecdotal evidence to at least make the claim - the ongoing requests by the technology industry for increases in H1B work visa quotas, the chronic problems with students eschewing math and science programs as examples. But probably the most acute indicator I have is a general lack of understanding of what it means to be productive. I teach college level (graduate and undergraduate) courses in business management - primarily management information systems - and I see the effects of the assumptions that primary education and government programs can or do prepare young people to be productive. An example might illustrate my point:
As a matter of course, in every class I teach, I ask my students, why are businesses in business?
Invariably, and without exception, I get the response, "to make a profit." It is entirely the wrong answer. To begin with, business organizations, as well as non-profit organizations are fictions of the law. To the same degree, profit is a fiction of Generally Accepted Accounting Principles/Practices. When I enlighten my students that businesses (and non-profits, for that matter) exist to produce wealth, it is a bit of a revelation for them, and gives them a perspective of business that is completely different than anything they've been exposed to in primary education or from government/populist rhetoric.
Being productive - specifically, producing wealth, both for the owners of the means of production in the form of Return on Investment, AND in the form of produced goods and services that make people's lives better - is the key. I'll defer to Adam Smith for articulating that concept better and earlier than I. Unfortunately, that concept is completely lost, both in general primary education and in government promises, programs and rhetoric.
Business organizations, however, ignore that concept at their peril and have far more vested interest in emphasizing productivity than either government or schools.

How does all this relate to the mimimum wage? First, Gary Becker (and other economists) seem to think it a compelling experiment to increase the minimum wage in order to gather data on possible negative employment ramifications. I would argue an equally compelling experiment in decreasing the minimum wage (or offering exception) in order to see if that has a positive impact on youth unemployment. At least, such an experiment has the merit of having never been tried.
Second, where primary education may provide at least part of the means to potential productivity in young people, actual productive work in the economy is the final test. School may show young people how to read, write and do arithmetic, but it is real productive work that shows them why.
Third, a mandated minimum wage is nothing more than a governmental assurance that a worker is productive, whether that assurance is valid or not.

Business, and the wealth they can produce, is far too important to be based either on fictions or false assurances.

Since 1980 there have been few changes in the minimum wage so the real minimum wage has fallen significantly.

But the sharp decline in the real minimum wage has been accompanied by a sharp drop in teen employment and the teen participation rate.

So again, we have a great theory about the minimum wage that is not supported by the facts.
Actually, the data supports the exact opposite conclusion.

Milton Freedom said to judge theory by its ability to forecast. Time and time again we have had predictions that higher minimum wages would cause major damage to low income employment. but it has never shown up in the data.

Actually, I have no theory - only a few observations and questions. The observations you cite - declining real minimum wage accompanied by declining teen participation rates since the 1980's - are somewhat suspect as well. Being an employer as well as an instructor, I can assure you that even minimum labor cost to potential employers have increased, not remained stagnant, since 1980. Increasing unemployment and other regulatory compliance costs count. Again, the wage compensation to the employee is only part of the total cost to the employer and value to the labor supplier. Second, I'm not convinced that 'the data supports the exact opposite conclusion' - to say so would be to indicate that youth unemployment can be cured by increasing the minimum wage.

Just to clarify, I'm not convinced that an abundance of $2.00 per hour jobs will necessarily attract hords of teens into the workforce either. I can say that I prefer to see policy makers concentrate on providing incentives to hiring and training minimally productive people to be productive, rather than offering even greater disincentives to potential employers - particularly when [increasing minimum wage] policies will not accomplish what they are projected to accomplish in the first place. Again, a $7.25 per hour imposed minimum wage will have entirely different impacts in Montana than California and in no geographical location will it provide the 'living wage' that is touted.

Having lived recently in San Antonio and having to find survival level work, I have to ask, who pays minimum wage today? Nobody. So raising it will do what exactly?

Whatever effect raising it will have, the effect will be buffered by the fact that most cheap labor jobs pay more than $2.00 above the minimum wage today.

As for the forseeable unavailablity of future math and science grads, students today pay attention to supply and demand as it relates to wages and careers. Since the dot bust demonstrated that IT careers are in fact not careers, but just a series of jobs leading to a midlife crisis, how many kids of those IT workers are going to be IT workers? NONE. Yes, that is economics at work. Layoffs today teach lessons not just to those laid off.

Kids should focus on being C students, so they grow up to be generalist managers, who according to economic theory, can ignore experts and make better decisions just because they are compensated better than experts. Then, to make sure they make more than the experts, they can lay off the experts. So now somehow, now, you want more experts?

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